World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Thursday, May 6, 2010

In a change of character for the market equity futures are down once again, dip buyers are apparently hiding. Below is a 5 minute chart of the DOW on the left and a 30 minute view of the S&P and its downchannel on the right:

The downside follow through yesterday also showed the change of character with people expecting a meaningful correction, they have shifted to selling the bounces. Frankly I would have expected some sort of bounce by now and think that it still could come later today or tomorrow but we may need to put a little more fear in place first with a good flush, we’ll see. It could be that this range over the past couple of days was a sideways wave 4 and there is one more leg lower to finish this wave. A break below /ES 1,155 will mean that another leg lower is underway, but a bounce above 1,175 will mean a correction of the decline.

The dollar is again higher overnight, it is in a parabolic rise towards the top of its channel while the Euro is crashing towards the bottom of its channel. The daily chart below shows how the dollar is getting close to its boundary:

Oil is continuing to correct, down nearly another buck and a half this morning at $78.60. It should find some support around $77 and that may correspond to the dollar reaching its channel top. Gold is just doing its own thing, yesterday falling and recovering, today is a little higher again.

Of course tomorrow’s employment situation report will be significant. All indications are that we’ll pick up 120,000 temporary census workers (on your nickel, of course), and that there will be positive numbers all the way around – that’s the set up anyway and the “Monster” employment index rose to cement those expectations, here’s Econoday:

HighlightsThe Monster employment index jumped 8 points in April to 133 for the biggest increase in nearly three years and the latest indication of recovery for the jobs market. Job postings in transportation & warehousing are on the rise as shippers respond to growing demand and slowing delivery times, and construction showed strength in a sign of recovery likely centered in the residential sector. Retail trade and manufacturing also gained, two sectors that have been showing building strength, as did mining. The data are seasonally adjusted.

Of course they are seasonally adjusted – must have a reason to be able to “adjust” the numbers and not provide the raw data, it’s the American way.

Unemployment claims came in roughly the same as last week and inline with estimates, falling from 448k to 444k, the prior week, of course, was revised higher:

HighlightsUnemployment claims improved for a third straight week but far from dramatically. Initial claims for the May 1 week fell 7,000 to 444,000, pulling the four-week average down 4,750 to 458,500. The prior week was revised 3,000 higher to 451,000. Continuing claims for the April 24 week fell 59,000 to 4.594 million, though the four-week average for this reading rose slightly to 4.649 million. The unemployment rate for insured workers is unchanged at 3.6 percent.

Month-to-month comparisons show very little change and are not strongly supportive for expectations of incremental improvement in tomorrow's employment report. Markets are showing no significant initial reaction to today's results.

According to the DOL, “States reported 5,354,259 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending April 17, an increase of 153,786 from the prior week. There were 2,279,478 claimants in the comparable week in 2009.”

That is still roughly a 3.1 million year over year increase in the number of people drawing Emergency Unemployment Compensation, something seldom reported in the media.

Nonfarm productivity was reported as rising 3.6% in the first quarter and 6.3% year over year. Meanwhile labor costs fell by a very large 1.9%. While that may sound like nirvana if you are a businessman, it is actually quite indicative of a deflationary environment. Here’s econoday:

HighlightsProductivity growth slowed in the first quarter while the recent decline in labor costs came to a near halt. Nonfarm business productivity rose an annualized 3.6 percent in the first quarter after a 6.3 percent surge in the final quarter of 2009. Analysts had forecast a 2.6 percent gain in productivity. Unit labor costs slipped an annualized 1.9 percent in the first quarter, following a fourth quarter drop of 5.6 percent. The market projection was for a 1.0 percent dip in costs.

The easing in productivity growth was largely due to less robust output growth and was largely expected, given the slowing in GDP growth. Output in the nonfarm business sector advanced 4.4 percent, following a 7.0 percent spike the prior quarter. The good news in the report is that hours worked has risen modestly for two quarters, indicating some improvement in demand for labor. Hours worked increased 0.8 percent in the latest period after edging up 0.7 percent in the fourth quarter. While modest, these gains are in sharp contrast to large declines in prior quarters.

Both productivity and costs were a little better than expected. This is good news for the Fed, which needs to see a continuation of subdued inflation pressures. Equities were up slightly on the news.

Equities were not up for very long.

Here’s my take. The “miracle” increases in productivity are not what they would lead you believe. Yes, technology and layoffs are forcing marginal increases in productivity, but not anything like the scale that’s being reported. That’s because productivity is measured in DOLLARS, not widgets. It is based on a trumped up GDP that is fluffed with false inflation figures, financial engineering, and false accounting. Turning on my printer and cranking out instruments of debt is not real productivity, it is Ponzi.

Falling wages against huge amounts of debt issuance is simply not good. It requires income to service debt. The lower the income, the less debt that it can service. The less debt in a debt backed money system, the less money. Sure, compensate by issuing even more debt, that will lead to a loss of confidence and events like you are seeing in Greece. Those events will spread to the rest of the world, you should be concerned – very concerned.

Yet what does the media tell you? Hey, there’s nothing to fear, there’s a “recovery in bloom…”

…Yet despite all the hemming and hawing, the market really hasn't been all that volatile. Between the high on April 27 and the low on Wednesday, the one-week swing on the Dow was 404 points.

But year-to-date the Dow is still up 4% and stands higher than it did a month ago. There are still plenty of signs that the U.S. recovery is moving forward.

That's not the case now.

Reality checkLet's compare the recent slide to the seven trading sessions between Oct. 7, 2008 and Oct. 15, 2008. During that period, the Dow ended higher or lower by an average of 464 points a day, and the swing between the high and low was 2,241 points.

During all that turmoil, the VIX jumped just 25%.

A little over a week later, on Oct. 24, 2008, the Dow plunged 312 points as part of a global market bloodletting and the VIX briefly hit an all-time high of 89.35 before closing off those levels.

During that time, the jumps in the VIX clearly reflected what was going on around the world.

Investors were in full-blown panic mode as credit seized up, Congress swooped in to prop up falling banks and signs pointed to the coming of the second Great Depression.

Money was yanked out of stocks and dumped into cash or low-yielding bonds. The yield on the three-year note, seen as the safest place to hide cash short-term, fell to a 68-year low of zero percent.

When the market was pricing in Armageddon, the VIX was in tune with the reality.

Recovery in bloomThat's not the case now.The threat of Europe's debt problems spreading is out there, but it's been out there for months. It's one of the factors that caused the 9% selloff on the S&P 500 between Jan. 19 and Feb. 4. But since that time, stocks have recovered and moved higher. The S&P 500 is currently up 4.5% year-to-date and up 10% since its February lows.

Most recently, European leaders pledged to provide Greece with $146 billion in loans over three years, taking the edge off worries that the nation would default on its growing debt.

That’s nice, nothing to fear. Well, there is certainly nothing to fear for at least three Greeks, the rest of us living might want to think about what the central bankers are really up to just a wee bit more…

Oh, and don’t be concerned that despite the fact the market has gone up for 14 straight months that the number of new 52 week lows has risen to 44 on the NYSE while on the Nasdaq new lows are outnumbering new highs already. Yeah, that’s normal, nothing to fear.